Climate: investors
take actions
NOVEMBER 2015 - Update
fight climate change
Climate risk has become a concrete issue for a wide range of financial players,
and and there is a sharp increase in the run-up to the COP21. The G20 Financial
Stability Board is working on modelling the systemic
risk posed by climate change. California prohibited
its pension funds from investing in coal shortly after
Norway did the same with its sovereign wealth fund. Environmental NGOs
are mounting more and more campaigns, and announcements of green
investments, portfolio decarbonisation, and shareholder engagement to
compel companies to adopt business models compatible with the targeted
global warming limit of 2° Celsius are increasing.
Investor action
There are four main forms of investor action: divestment, shareholder engagement, green investments (see page 4) and portfolio
decarbonisation (see page 3). These actions follow the joint pressure of high level studies showing increasing risks associated with
climate change as well as highly vocal fossil fuel divestment campaigns targeting pension funds and more broadly the financial
community.
For the past 14 months, the Novethic research centre has analysed the extraordinary mobilisation of investors on
climate change. It has assembled a sample group of international investors whose engagements and initiatives have been closely
examined in a study already updated three times. In the last three months alone, 154 new investors have been added to the list,
and their total number has increased by 75% since February.
The first step for them is to assess the impact of their investments on climate change. This is reflected by the carbon footprint of their portfolios. Today, 132 investors, with assets worth € 9.445 trillion (up 10% in three months) have committed
to determining this footprint.
Three-quarters of the sample group are
asset owners (pension funds (17%),
foundations (17%), religious organisations
(23%), local authorities (7%), universities
(5%), insurance companies (2%)). While
the pioneers tended to be small-scale
ethical investors, the number of pension
funds has now grown by a substantial
55% in 3 months. More of the 166
pension funds surveyed are divesting
from fossil fuels (up 33% in 3 months),
and they each have, on average, €38
billion in assets. This is giving greater
visibility to the movement. A majority of
the most active investors are American or
British, but Australians are not far behind,
with small pension funds making engage-
Actions
July
2015
October
2015
Divestment
364
486
51%3.711
Shareholder engagement
291
303
32%11.087
Decarbonisation
16
34
4%3.324
Green investments
336
364
38%20.431
ments recently. In the United States, the
newcomers are big players, as the volume
of assets involved reach €11 trillion. A final
point: investors are diversifying their stra-
Climate: investors take actions - November 2015 update
% of the
sample group Assets
€trn
tegies, with one-third using a combination
such as divestment with shareholder
engagement or green investments. n
Carbon footprint
More assessment services, varied methodologies, and
a need for better CO2 emissions data
T
he ranks of service providers offering to assess the carbon
footprint of investment portfolios have grown a great deal
in recent months. Although the earliest on the scene, like
Trucost and South Pole Carbon, have performed more than
80% of the assessments reported by investors who choose
to communicate on this subject so far, there are now ten or
so others proposing similar services. The majority are nonfinancial rating agencies (MSCI ESG Research, Sustainalytics,
INRATE, oekom research and EIRIS), though Bloomberg and
some index providers are now engaged in this activity too.
Thus, the carbon footprint is progressively becoming stan-
dard information provided to investors and made more easily
available via classic financial databases. The methodologies,
however, are not standardised yet, nor are the emissions data
supplied by companies.
Worth noting is the work backed by Carbone4, which wants to
go beyond the carbon footprint and integrate in a single ratio
the projected emissions, including indirect impacts as well as
emissions avoided owing to energy efficiency processes or
the use of renewable energies. n
Temporal evolution of the
Montreal Carbon Pledge signatories
31%
44%
17%
The Montreal Pledge was initiated by the PRI in
September 2014 to obtain a commitment from
responsible investors to measure and disclose
their portfolio carbon footprints in time for the
COP21.
n 4th quarter 2014
n 1st quarter 2015
n 2nd quarter 2015
n 3rd quarter 2015
8%
As of summer 2015, about sixty investors had
signed the Pledge, but the movement has picked
up steam recently, with the number of signatories
rising to over 100 during October. Two-thirds of
them are waiting until the last moment to report
their carbon footprint data.
Two-thirds of the new signatories are asset managers, including heavyweights like Aviva Investors,
HSBC Global AM, ZKB and Union Investments,
though there are also institutional investors like
Railpen, USS or APG, most of whom are European. n
Investors disclose their portfolio carbon footprints
A
ltogether, 132 investors have committed to assessing
the carbon footprint of their portfolios, which contain a
total of € 9.5 trillion in assets. Forty-five per cent have
already disclosed the footprint of all or part of their
assets (worth more than €4 trillion). Fifty per cent
are asset managers, who are taking the lead in
this trend, followed by pension funds (about 30%).
The remaining 20% fall into diverse categories.
The main dark spot in this encouraging picture is
that only about ten investors give a clear explanation
of their methodology. Since there is sharp disagreement over assessment methodologies, this is an obstacle
to comparing the data reported by investors. Given the data
available, we can say that a majority of investors choose to
measure GHG emissions by millions of euros (or another
2
currency) invested, thus limiting their footprint to
scopes 1 and 2. Their indirect emissions (scope
3) are not counted, which reduces the assessment’s main impact for certain sectors. They
generally present their results by comparing their
emissions to those of their benchmark. A presentation of historical trends is less frequent. The
figures reported indicate emissions 10% to 60%
below the benchmarks. The sharp disparities
between results suggest they are partly correlated with the methodologies used.
As for the best approaches, the AFD (Agence Française
de Développement) can be cited for the level of detail in its
methodology and ASN Bank for setting an objective of carbon
neutrality for its portfolios by 2030. n
Climate: investors take actions - November 2015 update
Low carbon investments
Portfolio decarbonisation engagements
D
ecarbonisation is one of the strategies available to investors who want to finance a low-carbon economy. It can be
applied to traditional portfolios or to index-based mandates.
Proof of its growing popularity, this strategy has been adopted
today by 34 investors with a combined €3.324 trillion in
assets, compared with just 16 investors three months ago.
These are major players. Most of them are institutional investors, two-thirds of which are pension funds, with an average
of €60 billion in assets. Half of these investors have opted for
a specific engagement, while the other half have chosen to
join the Portfolio Decarbonization Coalition supported by the
UNEP FI. Two-thirds of these investors combine decarbonisation with shareholder engagement and/or green investments,
with divestment used by a minority.
which is bringing out the first smart
green indices. Altogether, a dozen
families of specialised indices now
allow investors to make passive
management allocations based
on low-carbon strategies no matter
what their area of investment.
The sample group can be divided into three categories:
• Large pension funds – for example,
Sweden’s AP4, Britain’s BT PS and EAPF, and France’s ERAFP,
FRR and IRCANTEC – are choosing to allocate a growing
share of their assets to funds based on low-carbon strategies.
Even if these allocations do not yet represent a majority of
their portfolios, they still add up to several hundred million or
even, in some cases (ERAFP and FRR), more than a billion
euros.
• Asset managers, which propose low-carbon strategies
of the «best-in-class» variety designed to optimise the
performance of funds without fundamentally changing their
sector-based allocation. To accomplish this aim, they generally offer index funds that replicate low-carbon indices. The
choice has grown considerably in recent months, with indices
marketed by leading providers of traditional indices like MSCI,
S&P, DJI and FTSE as well as specialised companies like Solactive and ET Index, and innovators in the field like Edhec Risk,
• Last, financial institutions like ABP and the Caisse des
Dépôts in France. They have decided to shift the portion
invested in equities in their portfolio, by setting quantitative
targets. Their aim is to reduce their indirect emissions by
between 20% and 50% by 2020. The EAPF and ASN Bank,
two more modest-size players, are pursuing more ambitious
goals: the former has aligned its strategy with the 2°C global
warming limit and the latter is aiming to achieve carbon
neutrality for its investments by 2030. n
Two-degree target for EAPF
The UK Environment Agency Pension Fund (EAPF) is the first to announce a lowcarbon asset management strategy aligned with the objective of keeping global
warming below 2° Celsius. Dawn Turner, Head of Pension Fund Management at
EAPF, talks to us about this pioneering engagement.
What led you to choose this strategy?
Our role as the pension fund of a UK
environmental agency is twofold. First,
we are well placed to benefit from all
the research demonstrating the need
to rapidly move toward a low-carbon
economy. Second, we are expected to
set the example. That’s why we have
been pursuing a responsible investment policy for the past ten years. It
has served as a basis for defining our
road map. Right from the start, we
wanted it to be ambitious regarding the
climate as well as financially realistic,
since we manage €4.1 billion for our
40,000 members. We are convinced
that climate change is a real, long-term
financial risk and that we have a legal
responsibility to address it.
What are the key features of the ‘2
degrees’ investment strategy?
There are three: green financing, to
which we will allocate 15% of our
assets by investing in low-carbon and
energy efficiency or adaptation projects.
Ultimately we want to allocate a quarter
of our assets to the financing of a clean
and sustainable economy through all
asset classes. The second aspect is the
future decarbonisation of our portfolios.
That means we will decrease by 90%
Climate: investors take actions - November 2015 update
emissions related to coal and by 50%
those related to gas by 2020, based
on our current exposure measured in
relation to our benchmark at 31 March
2015. We think selective divestment
from certain companies is a good way
to do that, but we believe that effective engagement with the majority of
them is indispensable to move toward
a low-carbon economy. The last dimension of the strategy consists in working
energetically with all parties – asset
owners, asset managers, researchers,
regulators and others – to increase the
volume of assets that are managed
taking into account the impacts of
climate change. n
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Green investments
Several shades of green investments
364 investors with more than €20.4 trillion in assets say they want to invest in the financing of the
green economy. It is hard to get a clear picture of the concrete actions these announcements might
translate into, as very often only general engagements or examples of projects are mentioned.
However, some of these investors provide enough details to know what the main investment
themes are. The primary one is the area of green infrastructures, including renewable energies
(28%), green bonds (17%) and energy efficiency (14%). n
Green bonds: promising engagements
T
he green bonds market has developed rapidly over the
last two years and is now an integral part of many lowcarbon investment strategies. Green bonds are indeed
a good way to make bond portfolios more environmentally friendly. An analysis of the sample group
surveyed by the Novethic research centre reveals
that 117 investors, with €17.5 trillion in assets,
are openly in favour of them. Some have made
specific engagements in this market, 26 have
joined the Green Bond Principles, 17 support the
Green Bonds & Climate Bonds Statement carried
by the Climate Bonds Initiative (CBI), and 27 are
signatories to the Statement of Investor Expectations
proposed by US-based CERES. Most of these investors give
little precise information about their policies, with the exception of a handful that are the most engaged. These include
the California State Treasurer’s Office (manager of the
CalPERS and CalSTRS pension funds), which says
it has already invested €1 billion in green bonds,
and the Swedish pension fund AP3, which has
allocated 5% of its bond portfolio (about €140
million) to them for several years. A few commitments are also noteworthy:
• Deutsche Bank, which invested €200 million
in early 2015, has committed to allocating €1
billion to green bonds
• KFW announced in April 2015 that it was creating
a green bonds portfolio with a target amount of
over €1 billion
• Zurich Insurance Group has set an objective of investing €2
billion in green bonds. n
Climate: Investors take action
A Novethic research centre study.
This paper is the short update of a more in depth study published in September 2015 by Novethic.
You can find it on novethic.com/reports
Please also visit Carbon-Risk.com, first pedagogical web app that shows the carbon intensity of each country, the
amount of unburnable fossil fuels and how states, investors and companies commit for preserving the climate. The
detailed information about this study’s investor sample is fully integrated and regularly updated on Carbon Risk.
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Climate: investors take actions - November 2015 update